Taxpayers to face double hit as KRA backdates taxes

Employers are preparing for a double hit later this month when uncollected taxes are remitted after an earlier suspension by a court, leaving tax agents with a compliance nightmare as a result of the Kenya Revenue Authority’s (KRA) decision to backdate the new taxes to 1 July.
Since the (KRA) decided to apply the taxes as of the implementation date under the Finance Act 2023, any taxes that are not deposited within the five-day timeframe are theoretically subject to penalties for non-compliance.
According to the Tax Procedures Act of 2015, late tax payments are subject to a 1% penalty for each full or partial month the amount remained unpaid. Commercial banks, which in 2022 raked in Sh37.3 billion, or 25.2% of all withholding tax collected by the KRA, are among those who will be severely hurt, according to a poll done by auditing company PwC. The primary source of withholding tax in the banking industry is interest expenses on deposits.
Between 2021 and 2022, total sector interest payments increased by 12.5% to Sh153.1 billion. The 20th day of the following month was changed by the Finance Act 2023 to five business days after collection as the deadline for withholding tax payments. “To comply with the Finance Act 2023, the following adjustments to withholding tax payment procedures have been made and will take effect on 1 July, 2023. The payment is now due five working days after the supplier/withholdee has been paid. The system will automatically apply late payment penalties and interest as prescribed by the Tax Procedures Act for all late payments, the KRA said in an internal note on iTax upgrades. This has taken into consideration weekends and holidays.
The Kenya Bankers Association (KBA) has expressed dissatisfaction with the modification to the window for remitting withholding tax collection to the KRA and claims that the modification has placed a heavy compliance burden on its members. The business lobby claims that in order to solve this and meet the demands of the sector, it would continue to engage with the Treasury and the National Assembly. 
“The Finance Act’s public engagement did result in some positive effects. That does not mean there aren’t any difficulties. According to Peter Mungai, chair of the KBA Tax Committee, “the five days provision for remittance of withholding tax collections is problematic, it is not working, and I guess it would be good if we pick this up in the ongoing conversations and see how to make the implementation business-friendly, less expensive, and more efficient.”
The National Assembly, however, has rejected requests for dialogue with the KBA on the issue of altering the schedule for sending withholding tax collections to the KRA. The tax agents were battling the five working day provision, according to Kimani Kuria, head of the Finance and Planning Committee, in order to maintain a consistent flow of revenue for their daily activities. “Agents gather this cash on the government’s behalf. Why do they wish to keep deferring tax collecting until the twentieth of the next month? It’s because they use these collections as operating money to finance their companies, according to Mr. Kuria, who spoke to the Business Daily. 
Employers must now retroactively make payments for the 1.5 % housing levy and the increased pay-as-you-earn (PAYE) rate for employees making more than Sh.500,000 per month. The regulation is causing cash-flow issues as well as an administrative nightmare for payroll management and accounting departments.
Employers must, for example, remit the housing levy within nine working days, which means the deduction must be paid by 11 August. Failing to do so could result in a penalty of 2% of the outstanding balance. However, given that salaries were paid in July before the Finance Act 2023’s conservatory orders were lifted on 28 July, companies will probably deduct the amounts from daily cash flows before collecting the remaining balances from employees at the end of the month. 
“Unfortunately, most firms have already arranged their payrolls for July 2023, which puts us in a difficult situation. According to the Executive Director of the Federation of Kenya Employers, Jacqueline Mugo, the High Court has postponed the implementation of the Finance Act, 2023, thus the new rates were not taken into account. “We are requesting that the government take into account the fiscal and operational difficulties employers are experiencing and approve arrangements that will enable employers to remit the July affordable housing levy in addition to the August levy.”
In order to accommodate the new tax deductions, including the increased PAYE rates, employers are required to update their payroll systems. For its part, the KRA has started distributing updated templates to businesses and workers so they can file tax returns and pay the right taxes. The taxman published a circular yesterday outlining the improvements brought forth by the 2023 Finance Act revisions, including PAYE filings. “In accordance with the Finance Act 2023, this particular return has been modified to take into account the new PAYE bands. With effect starting on 1 July, 2023, these modifications have also been made to the consolidated payroll return, according to the circular.
The affordable housing levy deductions have been included to the PAYE return sheet; the charge is automatically calculated at 1.5 % of the employee’s gross wage and is matched with the employer’s part of the contribution. After the Treasury Cabinet Secretary Prof. Njuguna Ndung’u successfully argued that the exchequer was losing more than Sh.500 million per day as a result of the freeze, the Court of Appeal removed an order blocking the execution of the Finance Act 2023 last Friday.
Business Daily